Rupee fall, a problem from within?

As the rupee edged down to almost 59 a dollar on Tuesday last (June 11), a few points became obvious. The continuous fall in the rupee since the middle of the previous week had set new records each day, both for the new lows as well as the extent of fall over successive trading days. Terms such as “lifetime” and” historical” lows ceased to have much significance. The rupee recovered on Wednesday to close at 57.80 but started losing again on Thursday although it recovered later in the day.

The gyrations in the rupee last week are due to a number of factors, with some of it remaining in the sphere of conjecture.

In the short-term, it is necessary to counter the negative sentiment, which seems to have enveloped all financial markets. In India, the stock exchanges, too, crashed in tandem with the rupee.

Sentiment

Unfortunately, however, sentiment is something very difficult to influence, especially when there is a herd mentality among market participants.

Importers who lose out when the rupee weakens rush to cover, that is buy dollars, while exporters hold on to their dollars hoping for an even better exchange rate.

It has always been assumed that the Reserve Bank of India (RBI) will intervene even though, according the market participants, it was evident for the first time only on Tuesday, when some public sector banks sold dollars, presumably on behalf of RBI.

But intervention however robust can only yield short-term results.

The RBI Governor, D. Subbarao, has been frank enough to admit that any intervention that does not pack the desired punch might backfire. And the biggest limitation for the RBI has been the size of the external reserves, which has been coming down. That, in turn, reduces the quantum of ammunition in the hands of the RBI.

Government spokespersons are right in saying there is no need for panic. But it is all too evident that there is no magic wand to wave the marauding dollar away.

It’s not rupee weakness but …

Various explanations exist as to why India is not unique with its currency problem. Almost all emerging market currencies are under pressure too, with some like the South African Rand declining to an even greater degree against the dollar.

That has prompted some analysts to conclude that it is not the rupee’s weakness so much as the dollar’s strength that is behind the currency depreciation. Such a conclusion is untenable. It is true that the American economy is showing signs of recovery. But the dollar has also gained on the belief that the American Federal Reserve that had unleashed an unprecedented quantitative easing programme might end it sooner than expected. The programme essentially targeted the floundering domestic economy by making available plenty of cheap money. Some of it flowed to countries such as India. If the programme ends, there is every likelihood of the capital flows going back to the U.S. to fund the revival.

Available statistics with the government show that both the debt market and the equities have witnessed a reverse flow of money. The fear is that the tempo of the outward flows might increase in the coming days.

Even though the latest saga of rupee depreciation has yet to work itself out, a few points merit attention. One, India’s external reserves, now $290 billion, are not export earnings but dollars accumulated by the RBI when it mopped up dollars coming in through short-term flows. Therefore, bulk of the reserves is in the nature of debt and do not “belong” to the country. They will have to be treated with lot more circumspection than in the past when a portion of the reserves were, quite controversially, used as seed money for infrastructure funds. That was sheer bad policy making but then in India there is no accountability for bad advice.

Short sightedness

Closely related is the extreme short sightedness of the UPA II in encouraging short-term external commercial borrowing by companies on the mistaken belief that the surfeit of money and the very low interest rates will prevail indefinitely. Obviously, the government had blithely ignored the most obvious risks arising out of currencies and asset-liability mismatches. Already the chickens are coming home to roost.

Wake up Guys! The US economy is turning around. While Emerging Markets are still returning better margins, investors are keen on positioning themselves in the US equities and stocks when prices are low. It's obvious the green bills are bound to flee back to the US.

With the US economy headed further North, the FED may soon taper off with its monthly $85 billion Bonds by-back program. Getting into the US Markets now is the prudent thing to do.

from:
Murali S

Posted on: Jun 19, 2013 at 07:31 IST

we can drastically cut our oil bill, by encouraging public transport and close all the car manufacturing units. when Singapore can thrive without encouraging cars, why not India? One Singapore dollar commands nearly Rs.45 and Singapore imports everything including water, milk,rice, meat etc - India is managed by looters and hence, the rupee depreciation

from:
n mohan

Posted on: Jun 18, 2013 at 20:52 IST

for which each one of us is responsible . So Try to use cheaper and indigenous substitute of any thing needing foreign exchange to reduce the effect of imported inflation on yourselves and to strengthen your national currency to kill imported inflation forever to be happy. Send mother India to buy useful stuffs and services particularly those needed for grass root development with a very strong currency in her purse rather than for costly and useless like oil,bullion,tech stuffs, Chinese,foreign tours,service,food (edible oil about 10 billion dollars a year)for which there are ample indigenous substitutes.for reexport any import is allowed.

from:
alok

Posted on: Jun 18, 2013 at 18:55 IST

India is pumping its economic balloon with the outside borrowed funds but not with the funds of productive growth.

from:
ASOK DAS

Posted on: Jun 18, 2013 at 12:55 IST

Since my childhood,i have been examining the rupee vs dollar case.
i have not seen such a deterioration in the case of Indian rupee.The reasons might be many as per now.It might be either due to plunge in the
US market towards stronger side or Europe being at the severe economic crisis.But we can still recover from this menacing crisis if the oil price still gets down,as it is a major aspect in imports as far as India is concerned.

from:
satwik

Posted on: Jun 17, 2013 at 23:05 IST

India must have NGOs that encourage people to not to buy Gold and other imported items.
Every small thing makes a difference.

from:
Abhinav

Posted on: Jun 17, 2013 at 17:16 IST

Its a sorry state of affairs. Too much knowledge is also dangerous. Our so learned PM and FM can't even manage loan and asset liability mismatch is shocking. They knew from beginning what will happen but they never intervened. Why they didn't is the big question?
The data provided is absolutely correct. Now FM asking not to buy gold is sheer stupidity. Rather than focusing on buying gold and blaming everything on international markets they should have worked towards generating more employment and infra projects rather than running MNREGA. Bloody drain on economy. These populist schemes will destroy Indian economy we are still not ready for these type of schemes.

from:
kshitij sarin

Posted on: Jun 17, 2013 at 13:21 IST

I keep reading about the value of rupee since the beginning of 1900. At one point rupee was much stronger than USD, and over years, reduced in value and now close to 60 per USD.
Why no serious action though we all know the consequences.What is the neutral level - as decrease or increase makes more problems to all. Can some one explain? Many thanks.

from:
V.Sivasubramaniam

Posted on: Jun 17, 2013 at 06:36 IST

The argument by Narasimhan and also Governor Subbarao that "India’s external reserves, now $290 billion, are not export earnings but dollars accumulated by the RBI when it mopped up dollars coming in through short-term flows. Therefore, bulk of the reserves is in the nature of debt and do not “belong” to the country." makes no economic sense. The reserves are foreign assets in the balance sheet of the country. But in the RBI's blance sheet, purchses of foreign currency from any source and adding them to reserves involves accumulation of foreign assets and also domestic liabilities. In aggregating RBI with the rest of the country RBI's domestic libailities cancel out since they are assets of domestic counter parties but the addition to reserves by RBI does not.

from:
T.N. Srinivasan

Posted on: Jun 17, 2013 at 05:45 IST

Thanks for this enlightening analysis. UPA II economic mismanagement is coming home to roost! Another 5 years of UPA III and India would be going back to IMF for a bailout with economy in ruin. Forget the dreams of inclusion in global big league of powerful nations India would be a laughing stock under this regime and its inept policies.